This is it, the final stretch before you retire. Perhaps you are one of the lucky ones with a pension. Or perhaps you don’t have one and relying on savings. Most of us have retirement as a savings goal from day one and yet somehow other things always have a knack of bumping it further down the line. After graduating from school or immigrating to Canada, we likely put a car, vacations, wedding, babies, or a condo before retirement. After all, retirement will happen much later in life. There are other priorities like dining out, concerts, and catching the latest fashion and technology trends.
Take a look at your current income and expenses. What do you anticipate will be your income sources at retirement? They may comprise of Canada Pension Plan (CPP), Old Age Security (OAS), pension, pension split with spouse, savings, rental income, investment income, and/or part time job? As a side note, the Canadian Government announced a one-time $300 payment for those receiving OAS and up to an additional $200 for those receiving the Guaranteed Income Supplement (GIS) as a form of financial relief for seniors during this pandemic crisis.
Next, consider your current expenses and future expenses. Most people plan for less income and less expenses. For example, if you are not going to work, you’re likely not going to pay for parking at work. Aside from the regular fixed expenses like housing, utilities, groceries, and transportation, there are also discretionary spending like travel and entertainment. In the early years of retirement, the Golden Years, many people like to travel and that tends to take a big bite from the budget. In later years, the Twilight Years, the funds may be allocated to needs like prescription medication, therapies (physiotherapy, occupational therapy), wheelchairs, installing special equipment like chairlifts and bathroom retrofits. Therefore, I argue that your retirement expenses would be about the same in the early years as the later years.
If you do have some savings but not a pension, there are some investment solutions that can help you with cash flow so that you can set it up and have a guaranteed income for life, regardless of how the markets perform. These are structured as annuities. Some companies offer contracts known as variable annuities and marketed as Guaranteed Lifetime Withdrawal Benefit. The purpose is to pass the risk of investing in the market to an insurance company. Every year that you do not take funds out, some will also add a notional bonus percentage. You can simply think of it as extra bonus on top of your investment funds.
If you have a permanent life insurance plan, like a Whole Life or Universal Life policy, they likely have some cash value which some individuals have tapped into for their retirement. There are specific strategies to use this option. You will want to be mindful of the amount of cash value, your tax rate, and the duration that you will need funds.
There are some seniors who have found that living in the Vancouver Lower Mainland, they have become house rich and cash poor. In an effort to supplement their retirement income, they may choose to use the equity in their home. This may be ideal for those who don’t have children or don’t intend to pass on their assets to the next generation. Since most people have worked hard to pay off their mortgage, this only serves as one of the last resorts to finance their retirement. One caveat that comes to mind is that spending these funds should be put to prudent use rather than frivolous expenditures.
If you are nearing retirement or currently in retirement, speak to your financial professional on approaches that best suit your circumstances. Each person is different. Proper planning should be put in place prior to implementation.
Ann Wong has over 20 year of experience in the financial services industry. She holds the Certified Financial Planner (CFP) and Financial Management Advisor (FMA) designations and is also a Fellow of the Canadian Securities Institute (FCSI). Email: hello@awsmgroup.com.
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